The Essential Galbraith

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THE ESSENTIAL GALBRAITH includes key selections from the most important works of John Kenneth Galbraith, one of the most distinguished writers of our time - from THE AFFLUENT SOCIETY, the groundbreaking book in which he conined the tern "conventional wisdom," to THE GREAT CRASH, an unsurpassed account of the events that triggered America's worst economic crisis. Galbraith’s new introductions place the works in their historical moment and make clear their enduring relevance for the new century. THE ESSENTIAL GALBRAITH will delight old admirers and introduce one of our most beloved writers to a new generation of readers. It is also an indispensable resource for scholars and students of economics, history, and politics, offering unparalleled access to the seminal writings of an extraordinary thinker.

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Editorial Reviews

Library Journal
Galbraith (economics, emeritus, Harvard) has for more than 50 years stood high at the intersection of academic life and public affairs and made significant contributions to both. This gathering of key selections from many of his writings has new introductions by Galbraith that make clear their relevance for the new century. The hallmark of Galbraith's thought is his insistence that an economy must be judged by the effect it has on the quality of life for current and future generations. His writings show a willingness to re-examine the strongly held beliefs of earlier generations, as when he stresses the need to reevaluate the supply-and-demand nexus by applying the countervailing power of labor unions and consumer coalitions against the great corporations. Another recurring theme is the need for a better balance between public and private outlays. The writing is graceful and often witty. Recommended for academic libraries. Harry Frumerman, formerly with Hunter Coll., New York Copyright 2001 Cahners Business Information.
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Product Details

  • ISBN-13: 9780618119639
  • Publisher: Houghton Mifflin Harcourt
  • Publication date: 10/28/2001
  • Edition description: None
  • Pages: 336
  • Sales rank: 784,627
  • Product dimensions: 5.50 (w) x 8.25 (h) x 0.75 (d)

Meet the Author

John Kenneth Galbraith (1908-2006) was a critically acclaimed author and one of America's foremost economists. His most famous works include The Affluent Society, The Good Society, and The Great Crash. Galbraith was the receipient of the Order of Canada and the Robert F. Kennedy Book Award for Lifetime Achievement, and he was twice awarded the Presidential Medal of Freedom.

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Read an Excerpt

I send this book to press and on to my readers with one slight sense
of concern. It is that someone will ask who decided that this was The
Essential Galbraith. The author will be a plausible suspect. In fact,
it was associates, my publisher and the wider professional and
reading public who were responsible. The selection here is of writing
that is thought to have had some durable impact on economic and other
scholarly thought or on the world at large.

Thus, as later noted, the piece on Countervailing Power, an
excerpt from American Capitalism, is still in print after nearly
fifty years. The balance of power between buyer and seller therein
described was considered a major modification of the traditional
competitive supply-and-demand construct to which all who have studied
economics were exposed. It is perhaps a measure of the enduring
nature of the term "the Conventional Wisdom," as defined in the
second essay, that one rarely gets through a newspaper today without
encountering it. Though I try, however unsuccessfully, to convey an
aspect of modesty, I am always pleased to have added this phrase to
the language.
The Affluent Society, from which several chapters are here
included, was the most widely published economic volume of its time.
After his nomination for President in 1960, one of the first
questions asked of John F. Kennedy was whether, if elected, he would
be guided by the ideas expressed by his known supporter in that book.
He responded favorably but also with a certain note of ambiguity.
Later in this collection come three pieces from The Great
Crash,1929, which was published in 1955, just after the twenty-fifth
anniversary of that catastrophic event. It was a bestseller at the
time; so it has remained to this day. Even now, as we are launched in
a new century, there is inevitable unease about the future of the
economy and therewith the stock market, so a knowledge of what
happened in 1929 is, indeed, still essential.
There are other essays here which were similarly selected and
thus selected themselves. The reader will, I think, have no trouble
accepting their relevance either to history or to the present day,
and I have added some headnotes to suggest my view of their
particular significance then and now. I end with a paper given at the
London School of Economics in 1999 on the unfinished business of the
millennium; this had the largest circulation both here in the United
States and around the world of any lecture I have ever given.
John Kenneth Galbraith
March 2001

If, as Professor Galbraith says in the preface, others are
responsible for the contents of this book, it is of primary interest
to inquire why he himself eschews the credit. It has been widely
believed that he is not a man for whom modesty is a familiar virtue,
so why does he find it necessary now to step back into the shadows?
The answer seems to lie in the fact that what has been considered
vanity could be better viewed as a deep sense of security. He is
secure in his basic beliefs and secure that his readers, for whom he
has the deepest respect, will be able to discern them. He is not
given to self-analysis, and so, while he clearly understands what is
the Essential Galbraith, he prefers that others define it.
It should first be noted that in the pages that follow,
readers will find John Kenneth Galbraith the economist and the
writer, with little trace of the diplomat, the art historian, the
novelist, the book reviewer, the theater critic or even, except in
the last essay, the lecturer. This is highly appropriate, because
economics has, in fact, been his chosen field and writing his
obviously innate talent. He has always believed that economics should
be studied not in the abstract or as a mathematical construct but as
it affects the lives of men and women every day. He is not afraid to
overturn or at least reexamine strongly held beliefs of earlier
generations, realizing that as technology, communications and
business change, so too must the economist's interpretation of them.
He has brought to the subject a new way of looking at the role of the
great corporations as they faced the countervailing power of trade
unions and consumer coalitions. He has identified those who are the
guiding intelligence of the corporate world, naming them the
technostructure, and has undermined belief in what he calls the myth
of consumer sovereignty. A better balance between public and private
expenditures has been a recurring theme in his writing, with its
reminder that the affluence of our contemporary society should be
made to extend to the poorest and most defenseless of our citizens.
The uses of power and the persistence of financial euphoria in our
public marketplace have consistently attracted his interest, as have
the problems of the developing countries, notably India. Above all,
the constant thread through his work is his concern with how
economics affects the quality of our daily lives and how it will
change that of succeeding generations.
These are some of the essentials of the Essential Galbraith,
but there are more. There is his continuing fondness for certain of
his economic predecessors -- for the gift for language and the basic
structure that Adam Smith gave to political economy, for the
irreverence and unique perception of Thorstein Veblen, for the
profound effect John Maynard Keynes and his General Theory of
Employment Interest and Money had and continue to have on the
economic world.
Finally, there is a writing style that illuminates and
enhances all that is said: sardonic humor, felicitous phrasing,
reasoned argument in reasonable words or, as he would say, clarity of
thought reflected in clarity of prose.
So how can the Essential Galbraith be defined? He is a
committed liberal, a compassionate optimist, a cautious but firm
iconoclast and a writer whose words can change the way the world
looks at its problems.
And none of that would he ever write about himself.
Andrea D. Williams
March 2001

The Essential Galbraith

Countervailing Power
[from American Capitalism]
This is a chapter from one of my first books, the generously titled
American Capitalism, which came out in 1952, barely into the second
half of the last century. Then, and for well over a hundred years
before, a near-sacred doctrine in the economic textbooks had been the
beneficent regulatory role of competition. It was the competition of
many sellers that protected the consumer and also the individually
powerless wage earner from the full economic effects of monopoly. The
preservation of competition through the antitrust laws -- the fabled
Sherman Act in particular -- was a vital element of public policy
going back to the latter part of the nineteenth century. Now, as I
argued in American Capitalism, a new process was at work: trade
unions, a countering organizational force, were the obvious response
to the greater power of the big corporations. Similarly, but less
evidently, when there was one expression of economic power -- such as
the large producer of consumer staples -- another one developed in
the form of the seller of those staples -- the A&P or the latter-day
Wal-Mart. The numerous and technically competitive farmers found
their best economic recourse in purchasing cooperatives when dealing
with those who bought and bargained for their product. Thus the
answer to monopoly was less and less the rule of law and more and
more the coercion of countering bargaining power. Not exceptionally,
perhaps, I carried this idea somewhat to the extreme, but it did
involve an impressive attack on established belief.
A substantial number of economists greeted my thesis with interest
and approval when it was published, but a much larger number of
defenders of the orthodox view were strongly at odds. At the annual
meeting of the American Economic Association, the most prestigious
gathering of economists, it was suggested by the head of the
organization, the distinguished Calvin Hoover of Duke University,
that there be a major reception for the book. This was quickly
vetoed, but a special meeting to discuss it was added to the program.
At lunch that day I heard someone at the next table say, "We must go
now -- it's time to hear them kill off Galbraith." It didn't prove to
be quite that bad; there was even some supporting comment. The
concept of countervailing power was allowed to pass into economics
and in a small way into public instruction. The book has been
continuously in print ever since -- as I say, a matter of almost
fifty years.
* * * *
On the night of November 2, 1907, J. P. Morgan the elder played
solitaire in his library while panic gripped Wall Street. Then, when
the other bankers had divided up the cost of saving the tottering
Trust Company of America, he presided at the signing of the
agreement, authorized the purchase of the Tennessee Coal & Iron
Company by the Steel Corporation to encourage the market, cleared the
transaction with President Roosevelt and the panic was over. There,
as legend has preserved and doubtless improved the story, was a man
with power a self-respecting man could fear.
A mere two decades later, in the crash of 1929, it was
evident that the Wall Street bankers were as helpless as everyone
else. Their effort to check the collapse in the market in the autumn
of that year is now recalled as an amusing anecdote; the heads of the
New York Stock Exchange and the National City Bank fell into the
toils of the law and the first went to prison; the son of the Great
Morgan went to a congressional hearing in Washington and acquired
fame, not for his authority, but for his embarrassment when a circus
midget was placed on his knee.
As the banker as a symbol of economic power passed into the
shadows, his place was taken by the giant industrial corporation. The
substitute was much more plausible. The association of power with the
banker had always depended on the somewhat tenuous belief in a "money
trust" -- on the notion that the means for financing the initiation
and expansion of business enterprises was concentrated in the hands
of a few men. The ancestry of this idea was in Marx's doctrine of
finance capital; it was not susceptible to statistical or other
empirical verification, at least in the United States.
By contrast, the fact that a substantial proportion of all
production was concentrated in the hands of a relatively small number
of huge firms was readily verified. That three or four giant firms in
an industry might exercise power analogous to that of a monopoly, and
not different in consequences, was an idea that had come to have the
most respectable of ancestry in classical economics. So, as the J. P.
Morgan Company left the stage, it was replaced by the two hundred
largest corporations -- giant devils in company strength. Here was
economic power identified by the greatest and most conservative
tradition in economic theory. Here was power to control the prices
the citizen paid, the wages he received, and which interposed the
most formidable of obstacles of size and experience to the aspiring
new firm. What more might it accomplish were it to turn its vast
resources to corrupting politics and controlling access to public
Yet, as was so dramatically revealed to be the case with the
omnipotence of the banker in 1929, there are considerable gaps
between the myth and the fact. The comparative importance of a small
number of great corporations in the American economy cannot be denied
except by those who have a singular immunity to statistical evidence
or a striking capacity to manipulate it. In principle, the American
is controlled, livelihood and soul, by the large corporation; in
practice, he or she seems not to be completely enslaved. Once again
the danger is in the future; the present seems still tolerable. Once
again there may be lessons from the present which, if learned, will
save us in the future.
As with social efficiency and its neglect of technical dynamics, the
paradox of the unexercised power of the large corporation begins with
an important oversight in the underlying economic theory. In the
competitive model -- the economy of many sellers, each with a small
share of the total market -- the restraint on the private exercise of
economic power was provided by other firms on the same side of the
market. It was the eagerness of competitors to sell, not the
complaints of buyers, that saved the latter from spoliation. It was
assumed, no doubt accurately, that the nineteenth-century textile
manufacturer who overcharged for his product would promptly lose his
market to another manufacturer who did not. If all manufacturers
found themselves in a position where they could exploit a strong
demand and mark up their prices accordingly, there would soon be an
inflow of new competitors. The resulting increase in supply would
bring prices and profits back to normal.
As with the seller who was tempted to use his economic power
against the customer, so with the buyer who was tempted to use it
against his labor or suppliers. The man who paid less than the
prevailing wage would lose his labor force to those who paid the
worker his full (marginal) contribution to the earnings of the firm.
In all cases the incentive to socially desirable behavior was
provided by the competitor. It was to the same side of the market --
the restraint of sellers by other sellers and of buyers by other
buyers, in other words to competition -- that economists came to look
for the self-regulatory mechanism of the economy.
They also came to look to competition exclusively, and in
formal theory they still do. The notion that there might be another
regulatory mechanism in the economy has been almost completely
excluded from economic thought. Thus, with the widespread
disappearance of competition in its classical form and its
replacement by the small group of firms if not in overt, at least in
conventional or tacit collusion, it was easy to suppose that since
competition had disappeared, all effective restraint on private power
had disappeared. Indeed, this conclusion was all but inevitable if no
search was made for other restraints, and so complete was the
preoccupation with competition that none was.
In fact, new restraints on private power did appear to
replace competition. They were nurtured by the same process of
concentration which impaired or destroyed competition. But they
appeared not on the same side of the market but on the opposite side,
not with competitors but with customers or suppliers. It will be
convenient to have a name for this counterpart of competition and I
shall call it countervailing power.1
To begin with a broad and somewhat too dogmatically stated
proposition, private economic power is held in check by the
countervailing power of those who are subject to it. The first begets
the second. The long trend toward concentration of industrial
enterprise in the hands of a relatively few firms has brought into
existence not only strong sellers, as economists have supposed, but
also strong buyers, as they have failed to see. The two develop
together, not in precise step but in such manner that there can be no
doubt that the one is in response to the other.
The fact that a seller enjoys a measure of monopoly power,
and is reaping a measure of monopoly return as a result, means that
there is an inducement to those firms from whom he buys or those to
whom he sells to develop the power with which they can defend
themselves against exploitation. It means also that there is a reward
to them in the form of a share of the gains of their opponents'
market power if they are able to do so. In this way the existence of
market power creates an incentive to the organization of another
position of power that neutralizes it.
The contention I am here making is a formidable one. It comes
to this: competition, which, at least since the time of Adam Smith,
has been viewed as the autonomous regulator of economic activity and
as the only available regulatory mechanism apart from the state, has,
in fact, been superseded. Not entirely, to be sure. I should like to
be explicit on this point. Competition still plays a role. There are
still important markets where the power of the firm as, say, a seller
is checked or circumscribed by those who provide a similar or a
substitute product or service. This, in the broadest sense that can
be meaningful, is the meaning of competition. The role of the buyer
on the other side of such markets is essentially a passive one. It
consists in looking for, perhaps asking for, and responding to the
best bargain. The active restraint is provided by the competitor who
offers, or threatens to offer, a better bargain. However, this is not
the only or even the typical restraint on the exercise of economic
power. In the typical modern market of few sellers, the active
restraint is provided not by competitors but from the other side of
the market by strong buyers. Given the convention against price
competition, it is the role of the competitor that becomes passive in
these markets.
It was always one of the basic presuppositions of competition
that market power exercised in its absence would invite the
competitors who would eliminate such exercise of power. The profits
of a monopoly position inspired competitors to try for a share. In
other words, competition was regarded as a self-generating regulatory
force. The doubt whether this was in fact so after a market had been
pre-empted by a few large sellers, after entry of new firms had
become difficult and after existing firms had accepted a convention
against price competition, was what destroyed the faith in
competition as a regulatory mechanism. Countervailing power is also a
self-generating force, and this is a matter of great importance.
Something, although not very much, could be claimed for the
regulatory role of the strong buyer in relation to the market power
of sellers, did it happen that, as an accident of economic
development, such strong buyers were frequently juxtaposed to strong
sellers. However, the tendency of power to be organized in response
to a given position of power is the vital characteristic of the
phenomenon I am here identifying. As noted, power on one side of a
market creates both the need for, and the prospect of reward to, the
exercise of countervailing power from the other side.2 This means
that, as a common rule, we can rely on countervailing power to appear
as a curb on economic power. There are also, it should be added,
circumstances in which it does not appear or is effectively prevented
from appearing. To these I shall return. For some reason, critics of
the theory have seized with particular avidity on these exceptions to
deny the existence of the phenomenon itself. It is plain that by a
similar line of argument one could deny the existence of competition
by finding one monopoly.
In the market of small numbers or oligopoly, the practical
barriers to entry and the convention against price competition have
eliminated the self-generating capacity of competition. The self-
generating tendency of countervailing power, by contrast, is readily
assimilated to the common sense of the situation, and its existence,
once we have learned to look for it, is readily subject to empirical
Market power can be exercised by strong buyers against weak
sellers as well as by strong sellers against weak buyers. In the
competitive model, competition acted as a restraint on both kinds of
exercise of power. This is also the case with countervailing power.
In turning to its practical manifestations, it will be convenient, in
fact, to begin with a case where it is exercised by weak sellers
against strong buyers.
The operation of countervailing power is to be seen with the greatest
clarity in the labor market where it is also most fully developed.
Because of his comparative immobility, the individual worker has long
been highly vulnerable to private economic power. The customer of any
particular steel mill, at the turn of the century, could always take
himself elsewhere if he felt he (there were few women) was being
overcharged. Or he could exercise his sovereign privilege of not
buying steel at all. The worker had no comparable freedom if he felt
he was being underpaid. Normally he could not move and he had to have
work. Not often has the power of one man over another been used more
callously than in the American labor market after the rise of the
large corporation. As late as the early twenties, the steel industry
worked a twelve-hour day and seventy-two-hour week with an incredible
twenty-four-hour stint every fortnight when the shift changed.
No such power is exercised today and for the reason that its
earlier exercise stimulated the counteraction that brought it to an
end. In the ultimate sense it was the power of the steel industry,
not the organizing abilities of John L. Lewis and Philip Murray, that
in years long past brought the United Steel Workers into being. The
economic power that the worker faced in the sale of his labor -- the
competition of many sellers dealing with few buyers -- made it
necessary that he organize for his own protection. There were rewards
to the power of the steel companies in which, when he had
successfully developed countervailing power, he could share.
As a general though not invariable rule one finds the
strongest unions in the United States where markets are served by
strong corporations, those in the automobile, steel, electrical,
rubber, farm-machinery and nonferrous-metal-mining and smelting
industries. Not only has the strength of the corporations in these
industries made it necessary for workers to develop the protection of
countervailing power; it has provided unions with the opportunity for
getting something more as well. If successful, they could share in
the fruits of the corporation's market power. By contrast, there has
not been a single union of any consequence in American agriculture,
the country's closest approach to the competitive model. The reason
lies not in the difficulties in organization; these are considerable,
but greater difficulties in organization have been overcome. The
reason is that the farmer has not possessed any power over his labor
force and has not had any rewards from market power which it was
worth the while of a union to seek. As an interesting verification of
the point, in California the large farmers have had considerable
power vis-à-vis their labor force. Almost uniquely in the United
States, that state has been marked by persistent attempts at
organization by farm workers.
Elsewhere in industries which approach the competition of the
model one typically finds weaker or less comprehensive unions. The
textile industry,3 boot and shoe manufacture, lumbering and other
forest industries in most parts of the country, and smaller wholesale
and retail enterprises, are all cases in point. I do not, of course,
advance the theory of countervailing power as a monolithic
explanation of trade-union organization. No such complex social
phenomenon is likely to have any single, simple explanation. American
trade unions developed in the face of the implacable hostility, not
alone of employers, but often of the community as well. In this
environment organization of the skilled crafts was much easier than
the average, which undoubtedly explains the earlier appearance of
durable unions here. In the modern bituminous-coal-mining and more
clearly in the clothing industries, unions have another explanation.
They have emerged as a supplement to the weak market position of the
operators and manufacturers. They have assumed price- and market-
regulating functions that are the normal functions of managements,
and on which the latter, because of the competitive character of the
industry, have been forced to default. Nevertheless, as an
explanation of the incidence of trade-union strength in the American
economy, the theory of countervailing power clearly fits the broad
contours of experience. There is, I venture, no other so satisfactory
explanation of labor organization in the modern capitalist community
and none which so sensibly integrates the union into the theory of
that society.
As observed, the labor market serves admirably to illustrate the
incentives to the development of countervailing power, and it is of
great importance in this market. However, such development in
response to positions of market power is pervasive in the economy. As
a regulatory device, one of its most important manifestations is in
the relation of the large retailer to the firms from which it buys.
The way in which countervailing power operates in these markets is
worth examining in some detail.
One of the seemingly harmless simplifications of formal
economic theory has been the assumption that producers of consumers'
goods sell their products directly to consumers. All business units
are held, for this reason, to have broadly parallel interests. Each
buys labor and materials, combines them and passes the resulting
product along to the public at prices that, over some period of time,
maximize returns. It is recognized that this is, indeed, a
simplification; courses in marketing in the universities deal with
what is excluded by this assumption. Yet it has long been supposed
that the assumption does no appreciable violence to reality.
Did the real world correspond to the assumed one, the lot of
the consumer would be an unhappy one. In fact, goods pass to
consumers by way of retailers and other intermediaries, and this is a
circumstance of first importance. Retailers are required by their
situation to develop countervailing power on the consumer's behalf.
As has been frequently noted, retailing remains one of the
industries to which entry is characteristically free. It takes small
capital and no very rare talent to set up as a seller of goods.
Through history there has always been an ample supply of men with
both money and ability and with access to something to sell. The
small man can provide convenience and intimacy of service and can
give an attention to detail, all of which allow him to coexist with
larger competitors.
The advantage of the larger competitor ordinarily lies in its
lower prices. It lives constantly under the threat of an erosion of
its business by the more rapid growth of rivals and by the appearance
of new firms. This loss of volume, in turn, destroys the chance for
the lower costs and lower prices on which the firm depends. This
means that the larger retailer is extraordinarily sensitive to higher
prices charged by its suppliers. It means also that it is strongly
rewarded if it can develop the market power which permits it to force
lower prices.
The opportunity to exercise such power exists only when the
suppliers are enjoying something that can be taken away, i.e., when
they are enjoying the fruits of market power from which they can be
separated. Thus, as in the labor market, we find the mass retailer,
from a position across the market, with both a protective and a
profit incentive to develop countervailing power when the firm with
which it is doing business is in possession of market power. Critics
have suggested that these are possibly important but certainly
disparate phenomena. This may be so, but only if all similarity
between social phenomena be denied. In the present instance the
market context is the same. The motivating incentives are identical.
The fact that there are characteristics in common has been what has
caused people to call competition competition when they encountered
it, say, in agriculture and then again in the laundry business.
Countervailing power in the retail business is identified
with the large and powerful retail enterprises. Its practical
manifestation over the last half-century has been the rise of the
food chains, the variety chains, the mail-order houses (now graduated
into chain stores), the department-store chains and the cooperative
buying organizations of the surviving independent department and food
The buyers of all the great retail firms deal directly with
the manufacturer, and there are few of the latter who, in setting
prices, do not have to reckon with the attitude and reaction of their
powerful customers. The retail buyers have a variety of weapons at
their disposal to use against the market power of their suppliers.
Their ultimate sanction is to develop their own source of supply as
the food chains, Sears and many others have extensively done. They
can also concentrate their entire patronage on a single supplier and,
in return for a lower price, give him security in his volume and
relieve him of selling and advertising costs. This policy has been
widely followed, and there have also been numerous complaints of the
leverage it gives the retailer on his source of supply.
The more commonplace but more important tactic in the
exercise of countervailing power consists merely in keeping the
seller in a state of uncertainty as to the intentions of a buyer who
is indispensable to him. The larger of the retail buying
organizations place orders around which the production schedules and
occasionally the investment of even the largest manufacturers become
organized. A shift in this custom imposes prompt and heavy loss. The
threat or even the fear of this sanction is enough to cause the
supplier to surrender some or all of the rewards of its market power.
It must frequently, in addition, make a partial surrender to less
potent buyers if it is not to be more than ever in the power of its
large customers. It will be clear that in this operation there are
rare opportunities for playing one supplier off against another.
A measure of the importance which large retailing
organizations attach to the deployment of their countervailing power
is the prestige they accord to their buyers. These men (and some
women) are the key employees of the modern large retail organization;
they are highly paid and they are among the most intelligent and
resourceful people to be found anywhere in business. In the everyday
course of business, they may be considerably better known and command
rather more respect than the salesmen from whom they buy. This is a
not unimportant index of the power they wield.
There are producers of consumers' goods who have protected
themselves from the exercise of countervailing power. Some, like
those in the automobile and the oil industries, have done so by
integrating their distribution through to the consumer -- a strategy
which attests to the importance of the use of countervailing power by
retailers. Others have found it possible to maintain dominance over
an organization of small and dependent and therefore fairly powerless
There is an old saying, or should be, that it is a wise economist who
recognizes the scope of his own generalizations. It is now time to
consider the limits in place and time on the operations of
countervailing power. A study of the instances where countervailing
power fails to function is not without advantage in showing its
achievements in the decisively important areas where it does operate.
Some industries, because they are integrated through to the consumer
or because their product passes through a dependent dealer
organization, have not been faced with countervailing power. There
are a few cases where a very strong market position has proven
impregnable even against the attacks of strong buyers. And there are
cases where the dangers from countervailing power have apparently
been recognized and where it has been successfully resisted.
An example of successful resistance to countervailing power
is the residential-building industry. No segment of American
capitalism evokes less pride. Yet anyone approaching the industry
with the preconceptions of competition in mind is unlikely to see
very accurately the reasons for its shortcomings. There are many
thousands of individual firms in the business of building houses.
Nearly all are small. The members of the industry oppose little
market power to the would-be house owner. Except in times of
extremely high building activity there is aggressive competition for
The industry does show many detailed manifestations of guild
restraint. Builders are frequently in alliance with each other,
unions and local politicians to protect prices and wages and to
maintain established building traditions. These derelictions have
been seized upon avidly by the critics of the industry. Since they
represent its major departure from the competitive model, they have
been assumed to be the cause of the poor performance of the housing
industry. It has long been an article of faith with liberals that if
competition could be brought to the housing business, all would be
In fact, were all restraint and collusion swept away -- were
there full and free competition in bidding, no restrictive building
codes, no collusion with union leaders or local politicians to
enhance prices -- it seems improbable that the price of new houses
would be much changed and the satisfaction of customers with what
they get for what they pay much enhanced. The reason is that the
typical builder would still be a small and powerless figure buying
his building materials in small quantities at high cost from
suppliers with effective market power and facing in this case
essentially the same problem vis-à-vis the unions as sellers of
labor. It is these factors which, very largely, determine the cost of
the house.
The development of countervailing power requires a certain minimum
opportunity and capacity for organization, corporate or otherwise. If
the large retail buying organizations had not developed the
countervailing power which they have used by proxy on behalf of the
individual consumer, consumers would have been faced with the need to
organize the equivalent of the retailer's power. This would have been
a formidable task, but it has been accomplished in Scandinavia where
the consumers' cooperative, instead of the chain store, is the
dominant instrument of countervailing power in consumers' goods
markets. There has been a similar though less comprehensive
development in England and Scotland. In the Scandinavian countries
the cooperatives have long been regarded explicitly as instruments
for bringing power to bear on the cartels; i.e., for exercise of
countervailing power. This is readily conceded by many who have the
greatest difficulty in seeing private mass buyers in the same role.
But the fact that consumer cooperatives are not of any great
importance in the United States is to be explained, not by any
inherent incapacity of Americans for such organization, but because
the chain stores pre-empted the gains of countervailing power first.
The counterpart of the Swedish Kooperative Forbundet or the British
Co-operative Wholesale Societies has not appeared in the United
States simply because it could not compete with the large food
chains. The meaning of this, which incidentally has been lost on
devotees of the theology of cooperation, is that the chain stores are
approximately as efficient in the exercise of countervailing power as
a cooperative would be. In parts of the American economy where
proprietary mass buyers have not made their appearance, notably in
the purchase of farm supplies, individuals (who are also
individualists) have shown as much capacity to organize as the
Scandinavians and the British and have similarly obtained the
protection and rewards of countervailing power.
I come now to a major limitation on the operation of countervailing
power -- a matter of much importance in our time. Countervailing
power is not exercised uniformly under all conditions of demand. It
does not function at all as a restraint on market power when there is
inflation or inflationary pressure on markets.
Because the competitive model, in association with Say's Law,
was assumed to find its equilibrium at or near full employment
levels, economists for a long time were little inclined to inquire
whether markets in general, or competition in particular, might
behave differently at different levels of economic activity, i.e.,
whether they might behave differently in prosperity and in
depression. In any case, the conventional division of labor in
economics has assigned to one group of scholars the task of examining
markets and competitive behavior, to another a consideration of the
causes of fluctuations in the economy. The two fields of exploration
are even today separated by watertight bulkheads or, less
metaphorically, by professorial division of labor and course
requirements. Those who have taught and written on market behavior
have assumed a condition of general stability in the economy in which
sellers were eager for buyers. To the extent, as on occasion in
recent years, that they have had to do their teaching or thinking in
a time of inflation -- in a time when, as the result of strong
demand, eager buyers were besieging reluctant sellers -- they have
dismissed the circumstance as abnormal. They have drawn their
classroom and textbook illustrations from the last period of
deflation, severe or mild.
So long as competition was assumed to be the basic regulatory
force in the economy, these simplifications, although they led to
some error, were not too serious. There is a broad continuity in
competitive behavior from conditions of weak demand to conditions of
strong. At any given moment there is a going price in competitive
markets that reflects the current equilibrium of supply-and-demand
relationships. Even though demand is strong and prices are high and
rising, the seller who prices above the going or equilibrium level is
punished by the loss of his customers. The buyer still has an
incentive to look for the lowest price he can find. Thus market
behavior is not fundamentally different from the way it is when
demand is low and prices are falling.
There are, by contrast, differences of considerable
importance in market behavior between conditions of insufficient and
excessive demand when there is oligopoly, i.e., when the market has
only a small number of sellers. The convention against price
competition, when small numbers of sellers share a market, is
obviously not very difficult to maintain if all can sell all they
produce and none is subject to the temptation to cut prices. Devices
like price leadership, open book pricing and the basing-point system
which facilitate observance of the convention all work well because
they are under little strain. Thus the basing-point system, by making
known or easily calculable the approved prices at every possible
point of delivery in the country, provided protection against
accidental or surreptitious price-cutting. Such protection is not
necessary when there is no temptation to cut prices. By an
interesting paradox, when the basing-point system was attacked by the
government in the late depression years it was of great consequence
to the steel, cement and other industries that employed it. When,
after the deliberate processes of the law, the system was finally
abolished by the courts in April 1948, the consequences for the
industries in question were rather slight. The steel and cement
companies were then straining to meet demand that was in excess of
their capacity. They were under no temptation to cut prices and thus
had no current reason to regret the passing of the basing-point
These differences in market behavior under conditions of
strong and of weak demand are important, and there are serious
grounds for criticizing their neglect -- or rather the assumption
that there is normally a shortage of buyers -- in the conventional
market analysis. However, the effect of changes in demand on market
behavior becomes of really profound significance only when the role
of countervailing power is recognized.
Countervailing power, as noted earlier, is organized either
by buyers or by sellers in response to a stronger position across the
market. But strength, i.e., relative strength, obviously depends on
the state of aggregate demand. When demand is strong, especially when
it is at inflationary levels, the bargaining position of poorly
organized or even of unorganized workers is favorable. When demand is
weak, the bargaining position of the strongest union deteriorates to
some extent. The situation is similar where countervailing power is
exercised by a buyer. A scarcity of demand is a prerequisite to his
bringing power to bear on suppliers. If buyers are plentiful -- if
supply is small in relation to current demand -- sellers are under no
compulsion to surrender to the bargaining power of any particular
customer. They have alternatives.4
I have been tempted to coin a new word for this which would have the
same convenience as the term "competition," and had I done so, my
choice would have been "countervailence." However, the
phrase "countervailing power" is more descriptive and does not have
the raw sound of a newly fabricated word.
This has been one of the reasons I have rejected the terminology of
bilateral monopoly in characterizing this phenomenon. As bilateral
monopoly is treated in economic literature, it is an adventitious
occurrence. This, obviously, misses the point, and it is one of the
reasons that the investigations of bilateral monopoly, which one
would have thought might have been an avenue to the regulatory
mechanisms here isolated, have, in fact, been a blind alley. However,
this line of investigation has also been sterilized by the confining
formality of the assumptions of monopolistic and (more rarely)
oligopolistic motivation and behavior with which it has been
approached. (Cf. for example, William H. Nicholls, Imperfect
Competition within Agricultural Industries, Ames, Iowa: 1941, pp. 58
ff.) As noted later, oligopoly facilitates the exercise of
countervailing market power by enabling the strong buyer to play one
seller off against another.
It is important, as I have been reminded by the objections of English
friends, to bear in mind that market power must always be viewed in
relative terms. In the last century unions developed in the British
textile industry, and this industry, in turn, conformed broadly to
the competition of the model. However, as buyers of labor the mill
proprietors enjoyed a far stronger market position, the result of
their greater resources and respect for their group interest, than
did the individual workers.
The everyday business distinction between a "buyers'" and
a "sellers'" market and the frequency of its use reflect the
importance which participants in actual markets attach to the ebb and
flow of countervailing power. That this distinction has no standing
in formal economics follows from the fact that countervailing power
has not been recognized by economists. As frequently happens,
practical men have devised a terminology to denote a phenomenon of
great significance to themselves but which, since it has not been
assimilated to economic theory, has never appeared in the textbooks.
The concept of the "break-even point," generally employed by
businessmen but largely ignored in economic theory, is another case
in point.

Copyright © 2001 by John Kenneth Galbraith
Preface copyright © 2001 by John Kenneth Galbraith
Introduction copyright © 2001 by Andrea D. Williams
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Table of Contents


Preface vii Introduction ix Countervailing Power 1 from American Capitalism The Concept of the Conventional Wisdom 18 from The Affluent Society The Myth of Consumer Sovereignty 31 from The Affluent Society The Case for Social Balance 40 from The Affluent Society The Imperatives of Technology 55 from The New Industrial State The Technostructure 66 from The New Industrial State The General Theory of Motivation 79 from The New Industrial State Economics and the Quality of Life 90 from Economics, Peace and Laughter The Proper Purpose of Economic Development 109 from Economics, Peace and Laughter The Valid Image of the Modern Economy 118 from Annals of an Abiding Liberal Power and the Useful Economist 134 from Annals of an Abiding Liberal The Founding Faith: Adam Smith’s Wealth of Nations 153 from Annals of an Abiding Liberal The Massive Dissent of Karl Marx 169 from The Age of Uncertainty Who Was Thorstein Veblen? 200 from Annals of an Abiding Liberal The Mandarin Revolution 224 from The Age of Uncertainty How Keynes Came to America 236 from Economics, Peace and Laughter The Speculative Episode 249 from A Short History of Financial Euphoria In Goldman, Sachs We Trust 255 from The Great Crash, 1929 The Crash 275 from The Great Crash, 1929 Things Become More Serious 292 from The Great Crash, 1929 The Unfinished Business of the Century 307 Speech given at the London School of Economics, 1999 Sources 315

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